Company Law Board
Dilip Bhargava vs Trackpart Of India Ltd. on 16 June, 2004
Equivalent citations: [2005]63SCL544(CLB)
ORDER
K.C. Ganjwal, Member
1. The petitioners have filed the present petition under Section 111A of the Companies Act, 1956 ('the Act') seeking rectification of register of members by removing the name of VLS Finance Ltd., respondent No. 2 in the petition, in respect of 2,64,558 equity shares of Rs. 10 each. The petitioners are the shareholders of the respondent No. 1-company. The petitioners jointly owned 10,89,146 equity shares of Rs. 10 each of the respondent-company.
2. The facts of the case are that the petitioners belong to the well-known 'Bhargava' family which controls Trackparts of India Ltd. The first nine petitioners are individuals, and the 10th, 11th and 12th petitioners are private limited companies under the control of the nine individual petitioners. The respondent-company No. 1 in its ordinary course of business obtained inter-corporate loans from VLS Finance Ltd. having its registered office at Defence Colony, New Delhi. The loan taken in few instalments presently stands at approximately Rs. 207 lakhs. The petitioners along with others gave collateral security to VLS against inter-corporate loan given by them to Trackparts of India Ltd. by way of deposit of their share certificates along with transfer deeds of Trackparts of India Ltd.
3. The learned counsel for the petitioners submitted that the said VLS did not inform the petitioners at any point of time that Trackparts of India Ltd. had defaulted or otherwise not repaid their loan and the petitioners for the first time came to know on 8th January, 1999 that 2,64,558 equity shares of Rs. 10 each belonging to the petitioners were transferred by respondent Nos. 3, 4 and 5, namely, Mr. K.N. Bhargava, V.N. Bhargava and Dr. G.N. Mathur sometime in August and September 1998 without giving any notice to the petitioners. The petitioners are not certain that the said shares were actually transferred or not and if transferred, then when transferred. The petitioner being aggrieved by the said acts of the respondents filed this petition for rectification of the said 2,64,558 equity shares of Rs. 10 each belonging to the petitioner in Trackparts of India Ltd. which have been transferred in the name of said VLS in gross violation of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (Takeover Regulations') as any acquisition of shares done except in accordance with the said regulations shall be void and illegal. The petitioners have submitted that the alleged transfer was more than 16 per cent out of which the shares held by the petitioners accounted for nearly 13 per cent and hence was against the specific provisions of the Takeover Regulations, inasmuch as the acquisition of shares carrying voting power to 10 per cent or more is prohibited unless the compliance of the aforesaid Takeover Regulations is made. The petitioners had filed an application in CP No. 35/98 on 3rd February, 1999 praying for the rectification of the register. The Principal Bench of this Board, while disposing of the aforesaid application along with the main petition and regarding the issue relating to transfer of the shares observed that if there is any illegality in registration of shares, the concerned shareholders have to initiate separate proceedings. The hon'ble Board also observed that the fact of these transfers was never brought to its notice in subsequent hearings raising a doubt as to whether the transfers are affected at all at that point of time. The petitioners have submitted that Section 111A(3) provides that a depository, company, participant or investor or the Securities and Exchange Board of India ('SEBI') may apply to the Company Law Board for rectification of register within two months from the date of transfer if it is in contravention of any of the provisions of the Securities and Exchange Board of India Act, 1992 ('SEBI Act') or from the date of intimation or transfer to the company. It is submitted that the petitioner had from the date of intimation of transfer vide application dated 7th January, 1999 filed an application for rectification of register before the Principal Bench of this Board on 3rd February, 1999 within the prescribed limit of two months and the liberty was given by the Principal Bench vide their order dated 30th November, 1999 that the petitioner had preferred the present application within two months of the prescribed limit.
4. The learned counsel for petitioner further submitted that after affecting the transfer of 3,44,658 equity shares, the respondent No. 2 approached the SEBI seeking exemption from making a public offer in terms of Chapter III of the Regulations. The SEBI vide their order dated 19th February, 2002, inter alia, rejected the application for exemption and directed the matter to be referred for adjudication in terms of Section 15H(ii) of the SEBI Act, which involves determination of penalty for non-disclosure of acquisition of shares and takeover. The learned counsel for petitioners has submitted that the imposition of the penalty is a separate and distinct action and imposition of penalty should not be interpreted to mean total absolution from non-compliance of the Takeover Regulations. The learned counsel also submitted that as per the case of Ammonia Supplies Corporation (P.) Ltd. v. Modern Plastic Containers (P.) Ltd. [1998] 17 SCL 463 (SC), the Company Court alone has jurisdiction to exercise the power for rectification. It was also submitted that with respect to transfer of 51,500 shares of the respondent-company, a penalty of Rs. 5 lakhs had been imposed under Section 15H, by the adjudicating officer, SEBI vide order dated 20th April, 2000 for violation of regulation 6 of the SEBI Guidelines. Accordingly, the petitioners submitted that their application be allowed to rectify the register of respondent No. 1-company in view of the illegal transfer which has been held as so by the SEBI vide order dated 19th February, 2002 against which no appeal has been filed according to the knowledge of the petitioners.
5. In reply to the above averments of the petitioners, the learned counsel for respondent Nos. 1 and 2-company submitted that the present petition has been filed for rectification of register of members of the respondent-company with respect to 2,64,558 equity shares of the petitioners. The petitioners jointly owned 10,89,146 equity shares of the respondent-company. The respondent-company in the ordinary course of business obtained intercorporate loans from VLS Finance Ltd. (R-2). To secure the same loan the respondent No. 2 and the respondent-company entered into a deed of pledge and Clause 6 of the same reads as follows :
"In the event of Trackparts of India Ltd. not paying the amounts under the said promissory note or notes/loan agreement together with all interest and charges or in case I/we at any time failing to maintain the margin of security above stipulated or which may be stipulated from time to time between the sum for the time being due to you and the market value of the security (Your valuation of the security shall be final and value of the security binding on me/us). I/we hereby authorise you (not so as to make it imperative upon you to do so) to sell and dispose of the said securities or any part of the same by public auction or by private treaty as and when you may in your absolute discretion deem fit and to apply the net proceeds of such sale in satisfaction so far as the same will extend towards liquidation of the amount due for principal and interest in respect of the said loans/facility(ies) together with all charges and expenses incurred by you to give me/us any notice of the sale and that such notice shall be deemed to have been waived by me/us. I/we hereby agree and undertake not to raise any dispute as to the value at which the said securities are transferred by you and the decision made by you shall be final and binding on me/us."
6. In Clause 11 of the aforesaid deed of pledge, it was further provided that the respondent No. 2 shall have an authority from time to time to collect dividend/interest on the pledged shares. The petitioner has also executed an irrevocable power of attorney and also blank share transfer deeds in favour of respondent No. 2 (VLS Finance Ltd.).
7. The learned counsel for respondents further submitted that the petitioners committed persistent default of the terms and condition of loan agreement and deed of pledge and did not pay to the respondent No. 2, the principal and interest accrued thereon. The respondent No. 2 was left with no option but to invoke the terms and conditions of loan agreement/deed of pledge. Accordingly, respondent No. 2 lodged 2,44,658 equity shares of Rs. 10 each with the respondent-company for transfer to respondent No. 2. The respondent-company transferred the aforesaid shares in the name of respondent No. 2 on or about 26th August, 1998. It was also contended by the respondent No. 1 that as per pledge deed, respondent No. 2 was entitled to only sell, dispose of or realise any or all of the securities. However, it was not open to the respondent No. 2 to transfer the securities being more than 15 per cent of the total share capital to its own name in violation of the Takeover Regulations and to sell the aforesaid securities in the open market in discharge of the liabilities but not for the purpose of colluding with the rival group of shareholders and substantially reducing the shareholding of the petitioners. It was also mentioned that the petitioners filed an application in CP No. 35/1998 on 3rd February, 1999 praying for rectification of register. The Principal Bench of this Board disposed of the aforesaid application along with the main petition. Regarding the issue relating to transfer of shares, the Principal Bench observed that if there was any illegality in registration of shares, the concerned shareholders have to initiate separate proceedings. The hon'ble Board also observed that the fact of these transfers was never brought to their notice in the subsequent hearings raising doubt as to whether the transfers were effected at all at that point of time. The learned counsel for respondent No. 1 also submitted that the imposition of penalty by SEBI would not absolve the non-compliance of the provisions of Act and Takeover the Regulations and does not correct the wrong committed due to non-disclosures. It is also submitted that the object of the SEBI Act and Regulations is the protection of the investors and the general public and, therefore, the object is to reverse the non-compliance of provisions of the Regulations which has harmed the investors. Therefore, according to respondent No. 1, the imposition of penalty is a separate and distinct action from that of ensuring compliance with the provisions of the Act and Regulations. The SEBI had imposed a penalty of Rs. 5 lakhs under Section 15H of the SEBI Act, for transfer of 51,500 shares vide order dated 20th April, 2000 by violation of Regulations.
8. The learned counsel for respondent No. 2 submitted that the petition is non-maintainable as it had not been filed within two months from the date of transfer of debentures held by a depository or from the date on which the instrument of transfer or the intimation of transmission was delivered to the company, as the case may be. The learned counsel for respondent No. 2 also submitted that in terms of provisions of an application for rectification of register of members, the application can be made by any one of the following five categories of persons : (1) depository, (2) company, (3) participant, (4) investor and (5) SEBI.
9. The learned counsel submitted that in the present case, petitioners being shareholders do not fall under any of the aforesaid categories and, therefore, they have no locus standi to file the present petition. The learned counsel relied on the judgment of the Hon'ble High Court of Bombay in the case of Shirish Finance & Investment (P.) Ltd. v. M. Sreenivasulu Reddy [2002] 35 SCL 27. In this case, the Hon'ble High Court held that a member of the company has no statutory right under the provisions of Section 111A to seek rectification of register of members. Para 134 of the judgment is reproduced below:
"...We find nothing in Section 111A which has the effect of taking away the common law right of a member of a company to seek rectification of register of a company. At best, it can be said that after insertion of Section 111A with effect from 20th September, 1995, a member of the company has no statutory right under the Act to seek rectification of register of members. His common law right, however, remains intact and he can assert that right by filing a suit before a court of competent jurisdiction. A learned Judge of this Court in Gopal Krishna Banga v. Poona Industrial Hotels Ltd. [1999] 34 CLA 177 (Bom.) has taken the same view...." (p. 145)
10. The learned counsel for respondent also submitted that in terms of provisions in Section 111A(3) an application of rectification of register of members is required to be made within two months of the date of transfer of any shares. In the present case, the shares were transferred in 1998 whereas the petitioners have filed present petition in January 2000. Accordingly, the petition is much beyond the period of limitation of two months prescribed time in Section 111A. It was also submitted that the petitioners have deliberately suppressed the facts, that in terms of the loan agreement/deed of pledgee they were required to hand over any accretion in shares by way of dividend/bonus/right shares to pledges, i.e., respondent No. 2, which has not been done. The bonus shares in the ratio of 2:1 declared by respondent-company in the year 1995-96, the dividend at the rate of 20 per cent for the year 1995-96 and at the rate of 10 per cent for the year 1996-97 have not been handed over to the respondent till date in spite of several reminders. It was also mentioned that in terms of aforesaid agreement, the petitioners were also required to furnish to respondent No. 2, fresh transfer deed on expiry of validity of transfer deed with which shares were pledged. As the petitioners failed to do so, the respondent No. 2 was forced to fight its right to have the shares transferred in its name. It was admitted by the petitioner and respondent No. 1 company at the time of hearing on 19th February, 2004 that the present petition is exclusively one, with the sole object of defeating the right of respondent No. 2, which is a gross abuse of process of law. Regarding non-following the SEBI Regulations, the learned counsel for respondent submitted that immediately on transfer of shares in its name, respondent No. 2 sent an intimation to SEBI vide letter dated 7th September, 1998 informing SEBI about the transaction as a matter of abundant precaution as respondent No. 2 was holding 16.41 per cent shares, i.e., only 1.41 per cent above the threshold limit of 15 per cent. The respondent No. 2 was intimated by SEBI vide letter dated 28th September, 1998 to make an application for exemption from making a public offer under regulation 4 read with regulation 3(1)(i) of the Takeover Regulations.
11. I have gone through the records of the case as well as written submission submitted by both parties and the arguments advanced by the learned counsel of both sides. It is admitted by both sides that the petitioners and other respondents, being the promotees of the respondent-company and their family members agreed to pledge some of their shares to respondent No. 2 and executed deed of pledge dated 18th February, 1985 against a loan of Rs. 2 crores granted by respondent No. 2 to the respondents-company. Clause 6 of the deed of pledged, authorised respondent No. 2 (VLS Finance Ltd.) to sell and dispose of the pledged securities or any part of the same in case the respondent-company makes default in paying the amount under the promissory note/loan agreement together with all interest and charges. Clause 11 of the aforesaid deed of pledge also provide that from time to time respondent No. 2 will collect dividend/interest on the shares. The petitioner had also executed an irrevocable power of attorney and handed over blank share transfer deeds in favour of respondent No. 2. The petitioners have contended that shares have been transferred without their knowledge whereas the respondents have mentioned that in terms of loan agreements, the petitioners failed to give bonus shares declared by respondent-company in the year 1995-96 as well as dividend for the years 1995-96 and 1996-97. As such respondent No. 2 exercised their right under the loan agreement/ deed of pledge to transfer shares to themselves. This has not been denied by the petitioners except to the extent that they came to know much later. The second point raised by the petitioners was the violation of provisions of SEBI Act and, therefore, instrument of transfer was not legal and prayed to rectify the register of members of the respondent.
12. The learned counsel for respondents submitted that this petition was not maintainable and only five categories could make an application under Section 111A(3) to this Board namely, (z) depository, (ii) company, (iii) participant, (iv) investors, and (v) SEBI. The petitioners do not fall under any aforesaid category and, therefore, they have no locus standi to file the present application. The learned counsel also referred to the judgment of High Court of Bombay. Shirish Finance & Investment (P.) Ltd.'s case (supra) to press his point.
13. I am inclined to accept the arguments of the learned counsel for respondent that the petition is not maintainable under Section 111A(3) as the petitioners do not fall under anyone of the five categories, i.e., depository, company, participant, investors or SEBI. As such, the petition is not maintainable under the provisions of Section 111A(3) and the same is, accordingly, dismissed.
14. There are no orders as to cost.
Note: After this order had been dictated, it was brought to my notice that the learned counsel for petitioners has filed an affidavit dated 7th April, 2004 on behalf of respondent-company which was received in CLB on 13th April, 2004 seeking respondent-company to transpose it as the petitioner in this petition. This affidavit has been filed after more than one and half months after the hearing concluded. It seems to be after thought on the part of the petitioners to throttle the proceedings with the sole object of defeating the right of respondent No. 2 who had provided intercorporate loan. I have not taken into account this affidavit.